We have worked closely with Loi Luu and Yaron Velner of KyberNetwork over the last few months, integrating the bZx protocol into KyberNetwork. Since Kyber provides an on-chain liquidity pool that can power applications including DEXs, it is in a prime position to integrate other dApps. Two of the features of Kyber we have found indispensable are their secure on-chain price feeds and on-chain liquidity. Without these two features, it would not be possible for us to securely execute margin calls. While we are a 0x-style protocol and have great love for the hybrid model 0x pioneered — going so far as to pattern ourselves in this fashion — off-chain orderbooks make it difficult for dApps to plug in. Clearly, there is room for both approaches in the ecosystem, each with their own strengths and weaknesses.
Update, March 2020: We don’t use Kyber on-chain price feeds anymore. Now Chainlink’s decentralized oracle network is used for price information.
Kyle J Kistner and Loi Luu in Zug, Switzerland at the Crypto Valley Conference
New Capabilities for Kyber
Kyber has a unique architecture involving a series of incentivized liquidity providers profiting from the bid/ask spread as trades are executed; KyberNetwork reserve managers are ostensibly in the business of market making. One potential limitation for Kyber is that while reserve managers can profit from the bid/ask spread, they’re also exposed to the volatility of the tokens they are holding. This is known as inventory risk. When the market is going up, reserve managers will profit from the value of their inventory going up. However, when the market is going down, the losses from their inventory exposure will exceed the profits made on the bid/ask spread. This means that Kyber reserves must depend, in large part, on individuals looking to monetize their existing holdings and not on professional market makers.
Market makers need the ability to become market neutral in order to insulate themselves from inventory risk. Now that the bZx protocol is integrated with Kyber, market makers can enter into leveraged short positions, allowing them mitigate inventory risk. This has large implications for the future liquidity of Kyber, expanding the pool of reserve contributors from those with idle tokens to those who professionally make markets. This can also be helpful to traders wanting to enter short or leveraged positions using KyberNetwork’s liquidity. With the integration of bZx, KyberSwap or any DEXs that integrate with Kyber will become fully featured.